Best Investments During Inflation

So, what is the best investment during inflation? The good news is that there are a multitude of securities and assets that can protect against inflationary pressure. The bad news is if such a scenario comes to fruition, your purchasing power is reduced. The main thing to keep an eye on is the money supply. Throughout the crisis, the monetary base has expanded, but has yet to materialize in the money supply. If/when this comes to fruition, you'll be prepared after learning how to invest for inflation below.

Interestingly enough, deflation has been the top concern amongst investors as of late and yesterday we detailed the best investments during deflation. But investors have quickly forgotten that inflation was the primary concern just a mere few months ago. This revisits a post we originally published in August 2008 examining investment scenarios for inflation versus deflation. Regardless of outcome, investors need to be prepared for either.

Why should you be worried about inflation? Well, how about because one of the greatest investors of this generation is concerned. Yup, Baupost Group's Seth Klarman is worried about inflation. Not to mention, Kyle Bass, the hedge fund manager who predicted the subprime crisis as well as sovereign defaults has voiced concern about inflation and significant currency devaluation around the globe. For every prominent investor worried about deflation, there is another concerned with the converse scenario.

Here are the best investments during inflation:

Avoid Cash/US Dollars: Inflation typically results in domestic currency devaluing. You can fight this by simply not holding it and allocating the capital into other assets and investments. Nowadays, cash is most certainly part of the asset allocation picture. During inflation, you want to have as little of it on hand if possible. Since it devalues during inflation, those of you wishing to press your bets against the US dollar can buy the PowerShares Bearish US dollar index fund (UDN).


Buy Gold & Precious Metals: If you'll think back toward the end of the crisis, gold was all the rage. As the Federal Reserve's printing presses worked overtime to churn out US dollars to resuscitate the economy, many became very worried about inflation. Their number one investment to protect against this? Gold. While precious metals in general are a solid bet, gold in particular is seen as a hedge against uncertainty and a store of value. For an in-depth thesis as to why you should buy gold during inflation, we turn you to out post on successful hedge fund manager John Paulson's gold fund. He launched this vehicle last year as a means of betting against the US dollar. Another option is the stocks of companies that mine the metal. One hedge fund recently opined that gold is good, but gold mining stocks are better.

We've detailed how countless other prominent investment managers favor yellow bricks. John Burbank's Passport Capital outlined the rationale for owning physical gold. David Einhorn's hedge fund Greenlight Capital also owns physical gold. Those of you who don't have access to physical bars can invest via the SPDR Gold Fund (GLD). Practically all of the hedge funds that are not investing in physical gold use this investment vehicle for their gold exposure. If gold doesn't tickle your fancy, legendary investor Jim Rogers sees opportunity in silver and palladium which can provide you with precious metals exposure. PALL is the ticker for playing palladium while SLV is a way to play silver.


Buy Crude Oil: Going long oil ties into the whole 'buy commodities' theme as protection. In a truly inflationary environment, oil is supply inelastic; any increase or decrease in price would not result in a corresponding increase or decrease in supply. In the past we've outlined how to invest in crude oil, as there are many investment vehicles out there, each with pros and cons. These funds include USO, DBO, & USL and are examined in-depth via the link above.


Short Fixed Income: Bonds should be avoided due to a weak domestic monetary system. In particular, avoid US Treasuries as they will underperform. As yields start to rise, bond prices will fall. A plethora of prominent investors have gone this route in order to gain inflationary protection. Seth Klarman has purchased out of the money puts on bonds. He's acquired tail risk insurance against a sharp rise in interest rates that protects him should rates skyrocket to 10%. Legendary hedge fund manager Julian Robertson had previously put on a curve steepener trade and then shifted to a constant maturity swap (CMS) trade. These are more advanced trades and typically are reserved for institutional investors. Retail investors can buy puts on or short the iShares 20+ Year Treasury (TLT).


Buy Emerging Markets: A weak domestic currency (US dollar) implies higher returns can be found abroad in other countries. A monetary system in trouble in the home land means your dollars should be invested abroad (especially consider commodity producing nations such as Australia and Brazil). You can invest in either emerging market currencies, equities abroad, or investment funds denominated in those foreign currencies. For broad emerging market equities exposure, one can purchase iShares Emerging Markets Index (EEM). For the Australian Dollar, consider FXA and for Brazilian exposure, consider EWZ.


Buy Technology: While this was also a suggestion for investing during deflationary times, it applies to inflation under the same rationale. Regardless of environment, technology is in demand and will continue to evolve.


Buy Treasury Inflation Protected Securities: These types of treasuries (known as TIPS for short) provide the safety of a government bond with the bonus of protection against inflation. You can buy these outright, or via the iShares Barclays TIPS fund (TIP).


While inflation was all the talk only a few months ago, it has since taken a back seat to deflationary chatter. Given the back and forth, it only makes sense to examine both scenarios. In the depths of the 2008 crisis we broadly examined investment scenarios for inflation versus deflation. At the time, it was unclear what type of environment we'd be entering. While still not entirely evident to this day, many have postulated that deflation in the near-term will then give way to inflation in the longer-term. A compromise of views, if you will. We've mapped out inflationary defenses above and for a look at the converse scenario, be sure to check out the best investments for deflation. Now you have a loose framework for either environment.

Pasco Alfaro's Miura Global Management Buys Crude Oil Via United States Oil Fund (USO)

Pasco Alfaro's hedge fund Miura Global Management recently filed a 13G with the SEC regarding shares of the United States Oil Fund (USO). Due to activity on June 29th, 2010 Miura now shows a 7.5% ownership stake in the exchange traded fund with 4,241,000 shares. This is a brand new position for Alfaro's hedge fund as they did not own shares back on March 31st, 2010 when first quarter portfolio disclosures were made.

What's interesting here is the fact that the fund has used an exchange traded fund as a proxy for investing in oil rather than directly playing oil futures. Before assessing further, remember that since this is a commodity related investment rather than a stock, the rationale behind the pick might not be what it seems. This could simply be a bullish directional bet on crude oil (in part possibly spurred on by the Gulf oil spill). At the same time, Miura could be using this vehicle as a hedging instrument as they often have various alternative energy plays in their portfolio.

Either way, the fact that they hold such a concentrated position in this crude oil exchange traded fund (USO) is intriguing in and of itself. This is by far the largest pure crude oil position we've seen from the equity focused hedge funds we cover. In the past, we've detailed how to invest in crude oil via exchange traded funds. While that comparison highlights the pros and cons of the various vehicles available to investors, it's surprising to see a prominent hedge fund investing such a large sum in a somewhat flawed exchange traded fund. There are numerous negative aspects to using USO as a proxy for oil, many of which we outlined via an in-depth piece, how contango affects crude oil ETF's. Needless to say, the fact that USO merely buys front month crude oil contracts over and over leaves much to be desired.

So while we don't quite know the exact rationale behind Alfaro's investment for his hedge fund, we do know that USO is a vehicle more-so suited for near-term trading rather than investing longer term. Maybe more than anything they might have selected USO purely for its liquidity as other oil funds are far less liquid on a daily trading basis. We'll have to see if we can glean further information regarding their investment purpose (directional versus hedge) and their investment timeframe.

This is the first time we've detailed portfolio maneuvers from this hedge fund so let's get some background. Miura Global Management is a long/short equity hedge fund founded in 2004 by Pasco Alfaro and Richard Turnure. While Alfaro still manages the firm, Turnure left to pursue an alternative energy endeavor after spearheading many of Miura's investments in that space. Miura grew from $5 million in assets under management to upwards of $3 billion. The hedge fund focuses on cutting edge research, multifaceted risk management, and non-correlated returns. Miura Global is a 'Tiger Seed' hedge fund because it was seeded by legendary Tiger Management hedge fund manager Julian Robertson. As such, the fund is a part of the 'Tiger hedge fund family tree'.

Taken from Google Finance, the United States Oil Fund is "a limited partnership. USOF is a commodity pool that issues limited partnership interests (units) traded on the NYSE Arca, Inc. (the NYSE Arca). The Company’s general partner is United States Commodity Funds LLC (the General Partner) and is responsible for the management of USOF. The investment objective of USOF is for the changes in percentage terms of its units’ net asset value (NAV) to reflect the changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the changes in the price of the futures contract on light, sweet crude oil traded on the New York Mercantile Exchange (the NYMEX)."

For the latest investments from top managers, head to our daily hedge fund portfolio tracking series.